Do Nonprofits Qualify for the Employee Retention Tax Credit



The 2020 Tax Cuts and Jobs Act was designed to reduce taxes for businesses of all sizes. One of the provisions of the act was the Employee Retention Tax Credit (ERTC). This credit is a powerful tool that can provide financial relief to entities that are facing hardship as a result of coronavirus-related business disruptions.

Although ERTC is available for both for-profit and non-profit organizations, there are some qualifications and restrictions that need to be addressed. The aim of this article is to provide an overview on whether or not nonprofits qualify for the Employee Retention Tax Credit, as well as discuss some key benefits and potential concerns associated with utilizing this tax credit:

  • Do nonprofits qualify for the ERTC?
  • What are the key benefits of the ERTC?
  • What are the potential concerns associated with the ERTC?

Overview of the Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a federal tax credit designed to help businesses keep their employees on the payroll during the COVID-19 pandemic, and provide financial relief to qualifying organizations. The ERTC is an important lifeline for many businesses, including nonprofits, and can be a great way to provide relief during these difficult times.

This section will provide an overview of the ERTC, including:

  • Who qualifies for the credit.
  • How much is available.
  • How to claim the credit.

Eligibility Requirements

The employee retention tax credit is available to businesses and nonprofits, including certain organizations described in Sections 501(c), 527, or 4947(a)(1) of the Internal Revenue Code that have operated during any calendar quarter in 2020 and experienced an economic hardship due to the coronavirus pandemic. Qualifying employers must have had operations suspended by a governmental order related to COVID-19 or a decline in gross receipts of at least 50% compared with the same quarter in 2019.

Eligible employers receive a fully refundable tax credit for 50 percent of qualified wages paid up to $10,000 per employee per year from March 12, 2020 through December 31, 2020. The maximum credit amount is $5,000 for each employee for wages paid during the entire covered period. The calculation of this dollar limit is based on an employer’s average number of full-time employees employed each month during 2019 and including up to 100 employees (with some special calculation rules for employers with more than 100 employees). Qualified wages are limited to wages paid before January 1, 2021 that are not otherwise taken into account under other provisions of the Families First Coronavirus Response Act (FFCRA).

The IRS has provided guidance on eligibility requirements and mechanisms for claiming the employee retention tax credit. Employers should consider consulting with their tax advisors regarding their eligibility criteria and specific mechanisms necessary to claim this credit.

Calculation of the Credit

The Employee Retention Tax Credit, originally enacted by the Coronavirus Aid, Relief and Economic Security (CARES) Act, helps employers that are facing revenue losses due to the COVID-19 pandemic. The tax credit covers up to 50% of qualified wages or $10,000, whichever is less.

Nonprofits may be eligible for this benefit and can use it to offset their payroll taxes by claiming their refundable portion of the credit on Form 941, Employer’s Quarterly Federal Tax Return. The following criteria must be met in order to qualify:

  • The employer must have experienced either a full or partial suspension of its operations due to orders from an appropriate governmental authority related to COVID-19, or experiences a significant decline in gross receipts.
  • For those that experienced a significant decline in gross receipts for 2020 and 2021, employers must compare quarterly 2020 gross receipts with the same quarter from 2019. If the employer experiences a greater than 50% decrease from 2019 levels for any quarterly period during calendar year 2020 – regardless of whether there was an order from an appropriate governmental authority – they will be considered as having met this criteria.
  • Employers are required to make an election between claiming the Employee Retention Tax Credit or availing of certain other recovery funds and benefits under PPP loan forgiveness programs.

The credit amount is based on either qualified wages or qualified health care expenses incurred and paid by taxable entities between March 12th and December 31st 2020. The tax credit applies per employee which means each employee’s wages are subject to separate calculation until it reaches $10,000 total per employee; once maxed out no further credits can apply in regard to that particular employee.

In order for employers to be eligible for this tax credit they must have had fewer than 500 employees (full time equivalents) as of March 12th 2020; each individual who has worked at least one hour will considered as one full time equivalent position ( 40 hours/wk). For any additional employees hired after March 12th 2020 those include new hires are not taken into consideration when evaluating employees up against the 500 limit requirement.

How to Claim the Credit

Claiming the credit for 2020 is done either on a quarterly basis through qualified wages incurred during that quarter, or at the end of the year when employers can claim the credit in the form of a payroll tax offset. Eligible employers would claim the credit by completing Form 941, Employer’s Quarterly Federal Tax Return, or by submitting Form 944, Employer’s Annual Federal Tax Return.

To calculate qualified wages eligible for 2020 compensation and operational expenditures subject to the refundable tax credit, eligible employers are allowed to use an aggregate look-back period. Under this methodology, an employer may look back to any prior three month period in 2020 beginning March 12th and compare those wages and associated costs against the expenses paid after March 12th but before December 31st. Qualified wages are payroll costs for employees who were not working due to COVID-19 related closures or economic slowdown.

To be eligible for credit consideration, qualified W2 wages which include salaries, family medical leave benefits and cash tips should not exceed $10,000 on an annualized basis per each employee claimed from March 12th onwards in order to be considered part of the calculation for claiming this tax credit benefit amount. In addition only costs related to health insurance premiums are included as part of qualified wages when determining potential credits for each employee.

For new businesses that began operations after March 12th of 2020 business owners may use their total payroll costs incurred between March 13th and December 31st as a base period by which they determine their eligibility to claim these credits throughout 2021 via filings with Form 941 or Form 944.

Nonprofit Eligibility

The Employee Retention Tax Credit (ERTC) is a new credit created by the COVID-19 relief package that can help organizations, including nonprofits, offset their payroll costs. Nonprofits are eligible for the ERTC, but there are some qualifications they must meet to be eligible. Let’s take a closer look at the eligibility requirements for nonprofits to receive the ERTC:

  • Must have experienced a full or partial suspension of operations due to a COVID-19 related governmental order.
  • Must have experienced a significant decline in gross receipts.
  • Must have fewer than 500 employees.

Types of Nonprofits Eligible

The employee retention tax credit is designed to help employers – including large corporations, small businesses and nonprofits – who have been financially impacted by the coronavirus pandemic keep and pay their employees. Many types of organizations are eligible for the employee retention tax credit, including those which are organized under 501(c)(3) of the IRS Code, as well as certain political organizations, churches and conventions or associations of churches.

  • 501(c)(3) Organizations: Tax-exempt charitable organizations such as community foundations, private operating foundations and public charitable organizations (including religious organizations) all qualify for the employee retention tax credit. Additionally, veterans’ organizations and nonprofit cemeteries may also qualify if they are registered with the IRS under Section 501(c)(19).
  • Political Organizations: All state institutions of higher education which have been given a government purpose that serve or represent political entities or subdivisions (such as townships or school districts) may qualify for the employee retention tax credit.
  • Churches & Conventions/Associations of Churches: Generally speaking, a church that is exempt from taxation under Section 501(c)(3) qualifies for the employee retention tax credit. Similarly, conventions or associations of churches that have received a determination letter from the IRS affirming their exempt status also qualify for this benefit.

Requirements for Nonprofits

The new law provides certain nonprofits with the ability to take advantage of the Employee Retention Tax Credit (ERTC). In order to qualify, the organization must meet certain requirements.

For non-profits not exempt from paying federal income tax, they must have experienced either a full or partial shutdown due to COVID-19 related orders from a governmental authority, as well as had gross receipts for March 13, 2020 through December 31, 2020 that are less than 50 percent of what was seen during the same time period in 2019.

Nonprofit organizations that are tax exempt under section 501(c)(3) and 501(c)(19) of the Internal Revenue code and meet one of two criteria may also be eligible for the ERTC. This includes organizations that have experienced a decline in gross receipts of at least 20 percent over any quarter in 2020 compared to the same quarter in 2019; or organizations that can show they were closed down or operations were suspended due to orders from an appropriate governmental authority due to COVID-19 during any quarter.

Organizations should review how their specific situation applies when considering this potential credit. Carefully reviewing available information and seeking advice from accounting professionals will give nonprofits confidence when determining if they’re eligible for this credit.

How to Claim the Credit for Nonprofits

The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to employers who maintained operations amid the COVID-19 pandemic and experienced a reduction in gross receipts. Nonprofits are eligible to claim this credit, provided they meet certain requirements.

To be eligible for the ERTC, nonprofits must have been in operation since at least March 12, 2020 and must have closed or suspended their operations due to governmental orders related to COVID-19. They must also demonstrate a decrease of 50% in either quarterly gross receipts or total employees compared to the same quarter in 2019.

Nonprofits that meet these criteria may claim the credit on their quarterly payroll returns with the IRS. The credit is calculated based on 50% of qualified wages up to $6,000 for each employee for every calendar quarter; although special rules can apply for employing seasonal workers or having wages increase between certain periods.

For more information regarding eligibility criteria and how to file for this credit, it is recommended that taxpayers seek advice from a tax professional.


In conclusion, nonprofits do qualify for the Employee Retention Tax Credit (ERTC). In order to claim the Employee Retention Tax Credit, the nonprofit must meet several requirements; it must employ fewer than 500 employees in 2020, experience a decline in gross receipts greater than 20%, and pay wages to its employees between March 12, 2020, and December 31, 2020.

The ERTC allows nonprofits to receive a 50% tax credit up to $5,000 for each employee for wages paid between March 12, 2020 and December 31, 2020.

For more information about the ERTC and other options available to nonprofits during this time of economic hardships caused by COVID-19 pandemic, you can contact your local Internal Revenue Service Office or financial advisor.

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